1.1.1 Economic problem

The economic problem

The economic problem

Unlimited wants but a finite amount of resources

Scarcity

Scarcity is when there is a limited number of a resource. Scarce resources mean that decisions need to be made regarding what, how, why and for whom goods and services are produced.

Opportunity cost

Opportunity cost is the next best alternative to the choice you already made. Opportunity cost measures the cost of any choice in terms of the next best alternative foregone.

Example of an opportunity cost

If a landowner decides to use their property for farming, the opportunity cost is the potential income they could have earned by developing the land for real estate purposes.

Four factors of production

(CELL)

Capital

Enterprise

Land

Labour

PPF

A Production Possibility Frontier (PPF) shows the different combinations of goods and services a given country (or economy) can produce using ALL its available resources AND using them in the most efficient possible way. (PPFs can be shown with straight lines OR curves).

What does point A show?

At point A, the country is either not using all of its resources, or it is using them all but not very efficiently, or, more likely, a bit of both

What does point B show?

Point B is unattainable without economic growth

Consumor goods

Consumer goods are used by consumers with no future use, e.g. chocolate bars, TVs, sofas

Capital goods

Goods used by businesses to make consumer goods, e.g. machinery, tools, buildings

When PPF shifts out

Demonstrates an increase in economic growth. For example the increase in quantity/quality of one of the four factors of production.

When PPF shifts in

_{Very occasional. Is seen as economic decline, can be caused by a natural disaster or civil war.}

Positive economic growth - Short run

When an economy uses all of its resources most efficiently. (this does not shift the PPF out, but it shows that the economy is at its highest rate of efficiency they can achieve)

Positive economic growth - long term

There is an improvement in one of the four factors of production shifting the PPF outwards

Negative economic growth

When resources are used inefficiently.

The PPF will shift in if there is a decrease in the quality/quantity of one of the four factors of production.